How to take advantage of the economic impact of the Marcellus and Utica Shale

Terry Coyne, Grubb & Ellis

The Marcellus Shale is a layer of rock that contains a large amount of natural gas deposits and is believed to be one of the largest natural gas reservoirs in the U.S. Recent explorations have estimated that the Utica Shale, a deeper and larger layer, contains a much greater volume of natural gas.

While these reserves were recognized for years, it was neither practical nor cost effective to drill until recently, due to new extraction methods like horizontal drilling and hydraulic fracturing.

Sales of land in affected regions of Ohio have picked up as investors position themselves to take advantage of the buying and leasing frenzy, says Terry Coyne, SIOR, CCIM, executive vice president with Grubb & Ellis.

“If you’re interested, move quickly,” Coyne says. “Because while most people are not aware of the value of this land, there are speculators moving in who are buying it up cheaply.”

Smart Business spoke with Coyne about how property owners and potential investors can best capitalize on the interest in the Utica and Marcellus Shale.

What is the economic impact of planned drilling in Ohio?

Carroll County is the center of initial drilling development, but the impact will be felt in Summit, Portage and Stark counties as well.

Direct Utica gas exploration and development expenditures amounted to $246 million in 2011. They are estimated to ramp up to $14 billion by 2015. Over the next five years, oil and gas producers are projected to spend more than $34 billion, not including lease and royalty payments.

By 2015, Utica Shale development alone is estimated to create or support more than 200,000 jobs in Ohio. You make money in real estate in areas with employment growth, and that is explosive employment growth.

How is the interest in natural gas from the Utica and Marcellus Shale regions affecting real estate in these areas?

There is gas drilling going on, there are real results, and people are making money. Now, in sleepy towns like Wellsville and Toronto, people are buying property. Whether it’s land or buildings, investors are buying it up for the purpose of servicing the oil and natural gas business.

In Canton, there has been a million square feet of leases or sales in the last 30 days. That’s a lot in any market, let alone in Canton, where properties can stay on the market for a long time. Canton and Akron stand to profit because they fit inside the Utica area, but can offer better proximity and real estate than places like Belmont and Carroll County.

Two brothers that purchased a property outside of Zanesville for $400,000 just sold it for $2.4 million. People are in need of real estate in the shale areas, and if the property is a building that is ready to be occupied today, its value is increased because the demand is real.

Outside of the real estate business, people aren’t recognizing this quite yet. But there are anecdotal tales from the Pittsburgh market, where vacancy rates for industrial and office are both sub 5 percent because the oil and gas service business has descended on these properties for shale development.

In real estate, you want to be in a rising market. This is a rising market.

What can companies that are already established in these areas do to take advantage of the rising market?

You have to work with professionals to do two things: first, negotiate properly for your mineral rights. If you are looking to sell your building, make sure you either retain your mineral rights separately, or if you do sell your mineral rights with the building, make sure your price reflects it. Don’t give away your mineral rights. Retain them or get paid for them.

Second, when marketing your building for this specific use, you should connect with someone who knows the Utica/Marcellus real estate market.

Essentially, there are two ways to make money. One is through royalties; so every time a dollar of oil or natural gas comes out of the ground, the land’s owner gets some percentage of it. These royalties typically used to be 12 percent of the gross, but the standard now seems to be 17.5 percent and some deals have even reached 19 percent.

The other way to make money is through bonus checks, or ‘lease payments.’ For instance, a landowner might be paid 17.5 percent in royalties plus $1,000 per acre. In some situations, purchasers have paid $5,000 per acre just for the right to drill.

If you decide to sell your mineral rights, how can you ensure they are accurately valued?

It’s tricky, because you could just as easily get a dry hole as a hit. In this case, your property income is not very predictable. The best way to find out what the property income will be is to learn what neighboring wells have produced. That is public data that you can find yourself, or you can call an expert.

What kind of development can be expected in the near future?

There is a whole supply chain of vendors and suppliers moving in. We’ve already seen Timken Co., V&M Star and Republic Steel ramp up their capacity for products that are sold into the oil and natural gas supply chain. Then there are companies that haul water, provide mud, or provide well tending services, and others that build hotels and temporary housing, because of the need to handle the population of incoming workers. That will drive retail demand and housing demand.

Terry Coyne, SIOR, CCIM, is an executive vice president with Grubb & Ellis. Reach him at [email protected] or (216) 453-3001. For more information on Marcellus and Utica Shale, visit www.uticamarcellus.com.

Endeavour scraps Pennsylvania Marcellus shale purchases

HOUSTON ― U.S. oil and gas exploration firm Endeavour International Corp. has scrapped its proposed purchase of Pennsylvania Marcellus shale assets from SM Energy Co. and other minority owners.

Endeavour did not cite a reason for its decision.

In July, Endeavour had said it would buy the assets for about $110 million.

The Marcellus shale, which stretches from West Virginia and Ohio across Pennsylvania and into New York, is one of the biggest natural gas finds in the United States in decades, but the hydraulic fracturing drilling used to tap into the vast quantities of fuel locked in the shale rock has prompted environmental concerns in the region.

Boardwalk, Southwestern Energy ink Marcellus gas gathering deal

HOUSTON, Texas ― Units of Boardwalk Pipeline Partners and Southwestern Energy Company have agreed to construct a $90 million natural gas gathering system in the Marcellus Shale.

Boardwalk Field Services and Southwestern Energy Production Company have signed a 15-year deal for construction of the system expected to have a delivery capacity of 275,000 dekatherms per day when ready.

Under the deal, Boardwalk will own and operate the system, which will aid development of Southwestern’s Marcellus Shale gas wells in Susquehanna and Lackawanna Counties in Pennsylvania.

The gathering system will interconnect with Tennessee Gas Pipeline Company in Susquehanna County in Pennsylvania.

While Broadwalk Pipeline Partners’ shares were slightly up at $25, Southwestern Energy rose 3 percent to trade at $35.36 in early trade on the New York Stock Exchange on Monday.

Noble sets $3.4 billion Marcellus joint venture with Consol

NEW YORK ― Oil and gas producer Noble Energy Inc. will pay $3.4 billion to Consol Energy Inc. to form a partnership to develop Consol’s properties in the Marcellus Shale.

The move is Noble’s first into the Marcellus shale, one of the largest natural gas fields ever discovered, and comes as natural gas prices slump below $4 per million British thermal units.

The rapid development of the field that spreads from West Virginia and Ohio across Pennsylvania and into New York has spurred environmental worries around the hydraulic fracturing used to produce the fuel.

A U.S. Department of Energy panel last week called for greater disclosure around that drilling technology.

Under the agreement, Noble will pay $1.07 billion for a 50 percent stake in coal and gas producer Consol’s 663,350 undeveloped acres and fund $2.13 billion of Consol’s drilling costs over an eight-year period.

That spending will be capped at $400 million per year, and drops off when gas prices are below $4.

Noble will also buy a 50 percent stake in Consol’s 70 million cubic feet per day of existing Marcellus production for $219 million.

Noble said Consol’s properties had proved reserves of 400 billion cubic feet equivalent (cfe) at the end of 2010, but are estimated to contain as much as 7.4 trillion cfe.

Net production for Noble could reach 600 million cfe per day in 2015 and is expected to grow into the next decade.

Shares of Consol rose 5.5 percent in premarket trading to $44.75.